Landlords' rising repayment costs will likely hit tenants in the form of higher rents and fewer choices in terms of rental properties.
It’s been a couple of weeks since the Government’s mini Budget caused significant upheaval within the mortgage market.
The Chancellor’s statement spooked the markets to such an extent that mortgage lenders withdrew their products with virtually no notice, slowly reintroducing them at much higher rates.
For example, according to Moneyfacts, the average two-year and five-year fixed rate deals are now above 6%, for the first time since 2008 and 2010 respectively.
However, it’s not just owner occupiers or would-be first-time buyers who have been hit by this mortgage rate chaos ‒ landlords are also facing massive increases to their mortgage repayments.
And that will have a painful impact on those who rent their home, as well as the landlords themselves.
Rising bills mean rising rents
Just as homeowners are facing up to large jumps in their monthly repayments, those with buy-to-let mortgages are also in a tricky spot.
Most buy-to-let lenders pulled their products within days of the mini Budget, repricing them at far higher rates, much as happened with the residential market.
As a result, if a landlord is coming to the end of their existing deal and looking to refinance, they will have to handle higher repayments.
And that almost certainly translates into higher rents for tenants.
After all, when a lender assesses a buy-to-let mortgage application, one of the things they look for is how the size of the expected rent compares to a notional interest rate.
It is called the interest cover ratio, and it’s not unusual for lenders to look for a ratio of around 125% ‒ in other words, the rent needs to be significantly higher than the repayments would be on the particular rate being used for this stress test.
And lenders are ratcheting up that rate, making it far tougher for landlords to get the sums to add up without cranking up the rent they charge on their properties.
Removing relief
A further negative to bear in mind here is the way that the Government has stripped back the tax reliefs available on buy-to-let purchases.
It used to be the case that landlords could deduct the interest on their mortgage repayments from their rental income before then paying tax on it. This meant that Higher Rate taxpayers essentially enjoyed 40% tax relief.
That has been changed now, however, with landlords instead receiving a flat 20% relief which they could claim against the overall rental income.
It’s made buy-to-let far less attractive to amateur landlords, those who might have one or two properties to supplement their pension, compared with professional property investors who have been better able to absorb the costs.
With the changes we are now seeing on interest rates, buy-to-let might be even less viable for smaller landlords, prompting them to either raise rents sharply or look to sell up.
Why this is bad news for tenants
It looks likely that tenants will be hit with a double whammy as a result of this chaos.
First and foremost, their existing landlord will either hike their rents or give notice that they are looking to sell the property, meaning the tenants will need to find a new place to live.
And if tenants do look to move on, whether it’s their choice or their landlord’s, they will be faced with far less choice as a result of landlords leaving the market.
That imbalance is only likely to force rents up still further.
Now, there is the potential that all of these landlords selling up may make things a little easier for prospective first-time buyers.
After all, one of the big drivers in the astronomical house price growth that we have seen in the last few years has been the lack of supply ‒ we simply don’t have enough homes available for would-be homeowners to purchase.
Yet even that is not quite as straightforward as it might seem.
Yes, the price of the property might drop somewhat, but those potential homebuyers now have to work out a way to afford the much higher mortgage repayments they would incur from buying now.
And the higher rents that they will have to pay in the meantime will dent their chances of saving a sufficient deposit.
In essence, the answer to the housing issues we face in the UK aren’t simply making buy-to-let less attractive ‒ there needs to be a dramatic improvement to the rate at which we build new homes that people actually want to live in.
In the meantime, those who rent their homes are far from immune from the turmoil afflicting the mortgage market.
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